The moderating effect of Bank Ownership on the determinants of Financial Performance of Commercial Banks in Kenya

Abstract

The sustainability of a commercial bank is largely determined by its level of performance.The banks must generate the necessary income in order to be able to cover their costs of operations which are incurred as they go about their work. Over the time banking industry has faced a lot of uncertainties which are mostly due to technological innovations and the unstoppable forces of globalization; these changes have continued to create expansion opportunities as well as challenges to bank's managers to ensure their bank remain profitable and competitive.This study investigated the moderating effects of bank ownership on determinants of financial performance of commercial banks in Kenya. The objectives of the study were; To examine the effect of capital invested on the financial performance of commercial banks in Kenya, to determine the effect of credit risk on the financial performance of commercial banks in Kenya, to establish the effect of interest fluctuation rates on the financial performance of commercial banks in Kenya, to assess the effect of inflation rate on the financial performance of commercial banks in Kenya and to assess the moderating effect of bank ownership on determinants of financial performance of commercial banks in Kenya. The study adopted explanatory research design. The scope of the study was restricted to the assessment of the internal and external determinants affecting bank profitability of the 44 commercial banks registered by (CBK, 2014), with at least four years data for the years 2014, 2015 ,2016 and 2017. Secondary data obtained from the commercial banks audit report was used as the primary source of data. The completed data was then analyzed using descriptive and inferential statistics in order to establish the relationship between the various variables. Data analysis was done using STATA. Descriptive measures of mean, standard deviation were applied to explain the data. Panel Regression analysis was used to make statistical inferences and to test the study hypotheses. All the five hypotheses of the study were rejected, the results obtained were as follows; Capital Invested has a significant effect on the financial performance of commercial banks in Kenya P= 0.000<0.05. Credit risk has a significant effect on the financial performance of commercial banks in Kenya P= 0.030<0.05. Interest rates have a significant effect on the financial performance of commercial banks in Kenya, P= 0.016<0.05. Inflation rate has significant effect on financial performance of commercial banks in Kenya P= 0.009<0.05. The outcome of the moderated regression model showed that when the moderating variable, bank ownership, was taken into account, only Interest Rates was statistically significant P= 0.016<0.05 (p=0.016).The other variables that is; Credit Risk, Inflation Rate and Capital Invested were found to be not statistically significant. Various recommendations is making the main ones being Regulatory authorities should develop effective policies on credit risk and inflation rate management to ensure that banks are in a position where they can enhance their financial performance as well as to handle negative shocks. The study also recommended that poor performing banks increase their capital to ensure that their banks are efficient and to maximize profits in the long run and growth of the banks. Therefore, in pursuit for high financial performance and hence better financial performance of banks, the study recommended that management work towards getting more loans customers. Through this study, interest rates stood out as a key determinant of the financial performance of commercial banks in Kenya. It is under this observation that the study recommends further research on the optimum interest rate that will yield maximum financial performance of commercial banks in Kenya.